CEO Interview: Air Asia X’s Plan to Make Cheap Trans-Pacific Flights a Reality

Brian Sumers, Skift

- Feb 21, 2017 7:30 am

Skift Take

Just as Norwegian Air has on trans-Atlantic routes, Air Asia X might disrupt established trans-Pacific players and push down fares. But making money on long-haul flights is tricky, and Air Asia X might decide it has better options closer to home.

— Brian Sumers

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Editor’s Note: Following our previous CEO interview series in online travel, hospitality, and destinations, as well as our recent CMO series across verticals, we’ve launched another series, this time focused on the CEOs of leading airlines outside of the United States.

To better understand the challenges facing airlines in an age of fluctuating oil prices, rapid growth, and changing passenger expectations, our Future of Passenger Experience series will allow leaders in the industry to explain their best practices and insights.

The carrier is Air Asia X, a Malaysian long-haul, low-cost airline seeking to capitalize on established demand in a mature market. With one-way fares as low as $99, Air Asia X should have little trouble filling its Airbus A330s with sunshine-seeking Asian tourists, despite competing with Hawaiian Airlines, Delta Air Lines, and Japan Airlines. (The route technically originates in Kuala Lumpur and makes a stop in Osaka, but the airline expects Japanese tourists to fill most seats.)

On its own, this route is no big deal. But this could be the start of something bigger, because it’s the first time Air Asia X — a key component of Asia’s most-recognized low-cost brand — is flying to the United States.

During the next several years, Air Asia X could disrupt trans-Pacific travel as Norwegian Air has on trans-Atlantic routes. With many aircraft on order, Air Asia X might start new routes between East Asia and the United States, selling tickets at attractive fares and spurring new demand between Asia and cities like San Francisco and Los Angeles.

Still, it’s far from guaranteed. The decade-old, long-haul affiliate of Air Asia has at times struggled with longer routes, and in 2012, it canceled flights from Kuala Lumpur to London and Paris because they did not perform well. Instead, in the past five years, Air Asia X has focused on medium-length routes within Asia and from Asia to Australia and New Zealand. The Osaka-Honolulu route — it’s about a seven-hour flight — fits that model.

Nonetheless, Air Asia X probably has broader ambitions. It has ordered 66 Airbus A330neos, an aircraft with better range and fuel efficiency than the current-generation A330-300s already in its fleet. The A330neo should be capable of flying from East Asia to the Continental United States, though flights from Southeast Asia may be too far. Air Asia X also has 10 orders for Airbus A350-900s, an even longer-range aircraft, and it’s looking at adding more planes that may allow it to resume Kuala Lumpur-Europe flights or start other longer routes. The A350s do not yet have set delivery date, the company said.

Skift recently spoke to AirAsia X Group CEO Datuk Kamarudin Meranun to learn more about Air Asia X’s plans. In addition to being in charge of Air Asia X’s long-haul affiliate in Malaysia, Meranun also oversees AirAsia X Thailand and Indonesia AirAsia Extra.

Note: This interview has been edited for length and clarity.

Skift: You’ll enter the U.S. market in June with what is essentially a route from Osaka to Honolulu. Why start this way?

Meranun: We think the strength of the airline is actually leisure holidays. If you think about our flights to Australia, the first destination we chose was Gold Coast, where you have a lot of leisure demand. Likewise, with the United States, we thought we would go with a destination we would be able to market easily. And we see strong demand out of Japan going to Honolulu. You may feel like it’s a safe destination, but then again it’s a destination that we can build on. It’s a destination that has all the necessary ingredients that the airline needs. Based on the initial demand, it is very encouraging.

This doesn’t mean that we will stop at Honolulu. It means that will be our first destination, hoping that we can learn and understand the market. And from then on, we would be able to start a flight to any of the cities on the West Coast.

Skift: You’re starting Osaka-Honolulu with fares as low as $99 one-way. Can you make money that way, even with all your extra fees? What’s the strategy?

Meranun: It all depends. We have sold fares for zero. We have given away millions of free flights in the past, and we continue to do so. It all depends on how you build your model. In our case, you have the basic fare, but you also have options into upgrading them into a premium seat. You have options into bringing more luggage. You have options on food. And various other ancillary items. The key thing is offering the passenger the choice of paying for the services that he or she desires.

To that, as well, there is also a good marketing point. At $99, you may get a flight to Osaka, but you may not get that pricing coming back because all the prices at that bucket may be filled up. So on average, the fare will be higher than [$198 roundtrip]. If I sold all the seats at $99, I can bet you I would not make money. On average, you should be able to make a decent profit.

Skift: Let’s say Honolulu works. What’s next for you in the United States? Are you looking at markets like San Francisco and Los Angeles?

Meranun: We have interest in a lot of the cities on the West Coast, especially those that have a lot of demand coming from [Southeast Asia], as well as Japan. L.A. is an obvious choice. There’s a huge attraction in going to L.A. There’s Hollywood, there’s Disney, there’s Universal Studios. A lot of these attractions are familiar to people in Asia. That would be the obvious choice.

There’s also San Francisco. America has been great at promoting San Francisco. There’s the Golden Gate Bridge. A lot of the cities in America have been well-marketed in the Far East. But because a lot of the flights going to America are being serviced by legacy carriers, a lot of the fares are simply unaffordable for a lot of people.

Hopefully with this introduction [of Honolulu] and a lot of more destinations, and with affordable fares, we will be able to stimulate people to fly. We are looking for cities that are really familiar to people in this part of the world, such as Hawaii and San Francisco. And even Vegas. I wouldn’t discount Vegas as well.

Skift: From where in Asia would you fly? Your base in Kuala Lumpur likely is too far from the United States for current-generation aircraft.

Meranun: Yes, at the moment, with the aircraft that we own, we will not be able to fly direct. But the strength of the business right now is not in the long-haul. It’s in the medium haul.

That’s why we are doing all this long-haul, via a one-stop. We’re flying to Honolulu via Osaka. We’re flying to New Zealand via Gold Coast, [Australia.] That still remains the best option for our airline. But having said that, that doesn’t mean we will not pursue flying direct if we have the right aircraft and the right model. We are constantly reviewing our business to see where there is an opportunity, and where we have a cost advantage. There are a lot of aircraft coming out that may be cheap, so that may force an opportunity for us as well.

Meranun: I believe there is still a lot bigger demand than there is supply. We are hoping that we are able to stimulate a lot more people to experience a flight into the Continental United States with these affordable fares. We will be offering a different proposition.

Meranun: We are seriously looking into doing Europe, especially London. To me that is a very lucrative route. There are a lot of historical ties between Malaysia and London. And it goes very well with the Kangaroo route — from Australia through Malaysia and to London. There is a real demand and need. Right now, we don’t have an aircraft available but with all the aircraft available at attractive rates we are seriously looking at it. The timing is right.

We are shopping around with what’s available in the market and asking how can we package it in a way that we will be able to compete. The last time we did London and Paris, we weren’t using the right aircraft. We were using an A340, which has four engines. The numbers just didn’t stack up. And the fact that we went through that fuel price hike, it was just untenable for us to continue that service.

Skift: How do you expect legacy carriers in the United States and Europe to respond when you start entering their markets?

Meranun: There are a lot of legacy carriers flying between Japan and Honolulu. We are not adding a huge amount of capacity to it. At the same time, we hope to be able to stimulate demand from people who can’t afford to fly. For people who can’t afford to fly, but would love to fly, now there is a flight. There is room, so I don’t expect legacy carriers to bring their prices down. I don’t foresee a competition in that respect. I believe we are just complementing and getting a lot more people excited about the route. I have not seen any reaction so far. But let’s see.

Skift: You have 66 A330neos on order. They’re an upgraded, longer range version of the A330s already in your fleet. Will those help you fly longer distances?

Meranun: We will get our first delivery, probably in the second half of next year. We are working very closely with Airbus. We want them to give a guarantee on the range. We will probably be able to stretch it to about 14 hours. But that’s stretching it, so I’m not sure the A330neo will be able to reach the West Coast direct. We will probably still do it with one stop, probably out of Japan.

Skift: You also have A350s on order. Any plans for those planes yet?

Meranun: We are thinking about it. But that’s not the only [long-range aircraft] we’re thinking about. We are also looking at other aircraft as well. There are other aircraft that are available right now. We are looking at all the different options.

Skift: We spoke recently to Jayne Hrdlicka, CEO of JetStar Group, a low-cost competitor She mentioned that on ultra long-haul flights of 13 or 15 hours, customers may want a more full-service experience, rather than a low-cost one. Do you agree?

Meranun: There may be some truth to it, but I would discount it. If we are able to offer them a fare that is really, really attractive at the same time without reducing much of the services and comfort, I don’t think that would be a major issue to the customer. Even though we offer an affordable fare, it is premium service that we offer. To me, the driving force is fare, and whether you have a service that they want.

Air Asia has an unusually skinny seat on its A330s. Tony Lin/Flickr

Skift: You’ve done something unusual with your A330s. Just about every carrier in has a 2-4-2 configuration, with 18-inch wide seats. You have 3-3-3 with 16.5 inch seats. They may be the skinniest seats in the world. Do customers accept the seats because you have cheap fares?

Meranun: It’s not an issue with customers. At the end of the day, there is not that big of a difference in terms of the seat. At the same time, because of our cost in operating the plane, we are able to offer a lower fare to the customer. The benefits get passed on to the customer. So far, we have not seen any issues of complaints by the customers. Any time you fly our product, you will find it amazing that there is no difference with the cabin with the seats we are using.

Skift: You’re also among the only low-cost carriers with true business class seat, rather than premium economy. It’s an angled flat-bed, and there are 12 of them per aircraft. Why have a business class seating? How does it sell?

Meranun: It depends on the route. There are some routes where it is almost sold out on each and every flight. But we can’t change the configuration to suit the destination because it becomes a headache for us to do aircraft rotation and things like that. So probably, if ever we go into the much longer routes, we will probably have much bigger premium seating. The premium seat is selling very well.

Skift: You have some interesting products on board. You have a ‘Quiet Zone’, where kids younger than 10 are not allowed. It costs extra to sit there. How does that sell?

Meranun: It is pretty popular on some of the routes, especially to Australia, where they appreciate the privacy. But it’s not as popular on some of the routes, for instance the Chinese routes. Right now, we are re-looking at it. We constantly look at all our products. We will probably introduce some bundle for that. Or maybe we add a bit more innovation to make it more attractive. Where we can improve and innovate without changing the core concept, we will do it.

Skift: You also sell empty seats to existing passengers at the last minute, right? So someone can arrange to have an entire coach row for a relatively low price?

Meranun: It’s there, but it’s not something that we are really focusing on. We are redesigning some of the ancillary options. I think in the next few months you will see some new, positive developments.

Skift: So what sells well?

Meranun: Well, the food is great, especially on the long-haul. And then some of the duty free. Cosmetics. But there is still a lot of room to grow. We are introducing our own [in-flight entertainment] which is a tablet. That’s also gaining popularity. It’s something new. We are about to introduce internet on the the plane. Our goal is just to break even. We probably won’t be making money. But the good thing is then, during the flight, you will have a captive market who will be able to log into the internet, and we’ll be able to sell a lot more ancillary in terms of duty free product and all that.

Skift: Let’s finish with the broad question. What’s the future of long-haul, low-cost carriers? Do you think eventually low-cost airlines will be as powerful on longer routes as they are today on short ones in much of the world?

Meranun: From seven or 10 years ago, when we first started, I always said low-cost carriers would be a big thing. You’ve seen it in the States with Southwest. You’ve seen it in Europe with Ryanair. But there will always be room for legacy carriers. The problem with Asia is that there are a lot of national carriers. The way I look at it, there will be [consolidation] among the national carriers, especially the international carriers. Some of them will be phased out. But there will be a dual carrier [system]. People will want a choice. There will be low-cost carriers, and there will be legacy carriers. Low cost carriers will probably be growing bigger and bigger because obviously the population base and the market is much bigger. And a lot of people will trade down, especially during periods of economic crisis because everyone will still want to travel.

We want to be in the position — the same as Southwest in America and EasyJet and Ryanair in Europe. You can become of a certain size where you are unbeatable. You have the network, you have the cost advantage and it becomes crazy for anyone to try to compete. There might be some other low-cost carriers that fly niche markets, but as a whole, you will probably will have one or two big low-cost carriers and two or three big legacy carriers.

I think there is room for both types of carriers, but it’s definitely going to be very competitive. Because of that, cost is a major factor. Cost is like a second religion to us. It’s cost and cost and cost. As long as you are disciplined in terms of your cost, you will always be there. I’ve said it many times. It is easy to make money during good times. The challenge is whether you can sustain it during bad times.

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